Sumitomo Dainippon Pharma (4506): Engineering a Recovery – Never as Easy as Falling Off a Cliff
PSA is structurally negative on the outlook for the pharmaceutical industry, and cyclically negative on the sector from an investment strategy viewpoint. For a stock to look attractive in the current environment, it either needs to be cheap, with positive earnings momentum (e.g. Astellas (4503)), or to be in a strong position to change its fortunes for the better (e.g. Chugai (4519), or Sosei (4565)).
On 14.2x FY16e EV/OP, Sumitomo Dainippon Pharmaceutical (SDP) appears fully priced two years ahead of a patent cliff that will knock up to two-thirds off its earnings. It has acquired a late stage pipeline with potential but no guarantee, so needs luck on its side to get profits back up to the pre-cliff ¥50bil mark. In the absence of greater clarity on drugs such as napabucasin in colorectal and alvocidib in AML, in our view investors are paying a full price for a lot of risk with SDP.
Key Points
- A large earnings drop appears unavoidable in FY19 as Latuda goes off patent. SDP has been channelling its cash into the acquisition of drug companies as well as products in a post-Latuda strategy. The question will be how fast and to what degree earnings can recover.
- SDP’s focus is largely on cancer and neurology. New key products include napabucasin, alvocidib, and possibly SB623 for stroke.
- SDP’s success will also impact parent Sumitomo Chemical (4005).
This report provides an explanation of some of the technical terms associated with SDP’s pipeline, with the chemical analyst in mind.
Sumitomo Dainippon Pharma is engaged in the manufacture, sale/purchase, and import/export of pharmaceuticals, food additives, veterinary products, diagnostic agents and research materials. Pharmaceutical segment manufactures and sells medical and general pharmaceuticals including hypertension and angina drugs, digestive tract function prokinetic agents, peripheral circulation stimulant, and carbapenem antibiotics. Other business segment manufactures, purchases and sale of veterinary medicines, food additives, industrial chemicals, extracts, diagnostic drugs and materials for research and inspection; purchases and sells feed and feed additives.
Founded in 2009, Pelham Smithers Associates (PSA) provides market intelligence on Asian technology, focusing in particular on Japan. The industries covered by our team of specialists are: consumer electronics, telecomms, pharmaceuticals, internet, electronic parts and materials, automotive technology, retail and capital goods.
PSA produces both company and sector reports. The focus of PSA’s research is to identify winners and losers as new technologies impact the top and bottom lines of corporations. Critical to our research is the clear explanation of how these new technologies work and how they impact companies and industries.
The founding partners have worked closely together for twenty years and the team has more than doubled in size since 2012.
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